Journal of Corporate Renewal

Sept 2016 continued on page 22 Athird-generation, $20 million meat processing company was struggling in mid-2012.

It had virtually no liquidity and was overleveraged, cash-flow negative, and in default with its senior lender.

By any stretch of the imagination, it looked like bankruptcy was inevitable.

Yet the company didn’t file and not only survived but has also thrived. A unique, entirely out-of-court resolution achieved many of the economic benefits that a bankruptcy filing would have offered while allowing the family owners to maintain substantial equity and control of operations. That led, in turn, to a successful turnaround and ultimately to the owner reacquiring

100 percent of the company’s equity.

The company was founded in 1983 by a 30-year meat industry veteran.

Over the years it had grown its product line to include more than

50 premium specialty meat products sold across most of North America.

The company’s troubles dated to around 2009, when it acquired another meat company along with a second processing facility. To accommodate additional storage and prepare for planned growth, the company expanded its recently acquired facility.

However, instead of the steady
growth anticipated by its business
plan, the company encountered
many unanticipated obstacles.

First, the company overspent on the facility expansion by $1.5 million. Integrating and scaling up the two operations led to many operational inefficiencies. Meat input costs rose substantially higher than projected, further squeezing margins because price increases were hard to pass on to customers. Finally, the continuing recession lessened consumer demand and substantially reduced projected sales growth.

After several years of declining or negative profitability, by March 2012 the company found itself with an overleveraged balance sheet, depleted liquidity, and in default with its senior lender. By then overall debt had grown to $7.2 million, while EBITDA had fallen to just $729,000, resulting in a leverage ratio of almost 10 times.

The senior lender held $4.2 million of the debt in the form of two commercial real estate loans, a term loan and a revolver.

In addition, there was a $945,000 Small
Business Administration (SBA) 504
second lien loan on the commercial
real estate, $500,000 of SBA 7A loans
on equipment, $460,000 of local
development loans, and $1.1 million of
unsecured loans from private lenders.
EBITDA was clearly inadequate to meet
the $1.3 million of required principal
and interest payments on the debts.

It was only because of a long-term relationship with a meat vendor that the company was able to get extended payment terms, which allowed it to stretch its limited liquidity. The owner of the company mortgaged his home to provide funds to meet expenses and payroll and to plug the gap between receipts and disbursements.

With the company in default, the senior lender moved the loan to its workout group and in March 2012 required the company to hire a financial advisor1 and bankruptcy counsel. The company entered into the first of what was ultimately three forbearance agreements. The senior lender was willing to give the company some time to operate and to find either additional capital or a buyer. However, the lender was unwilling to advance any additional funds.